Latin America Economic Forecast

Economic Snapshot for Latin America

August 12, 2015

Growth to remain weak in H2, major currencies fall to fresh lows   

Latin America’s economy decelerated considerably in the first half of the year. Economic growth was dragged down by deteriorating conditions in Brazil and Venezuela and sluggish performance in the rest of the economies in the region. A GDP growth estimate elaborated by LatinFocus showed that Latin America slowed from a 0.8% annual expansion in the fourth quarter of 2014 to a tepid 0.1% increase in the first three months of 2015. Moreover, the region’s growth dynamics for the second quarter are not encouraging. According to the LatinFocus estimate, the region’s economy is expected to have expanded just 0.1% in Q2. Despite having been supported by a mild improvement in the majority of the economies, growth in the region was weighed down by the recession in Brazil and Venezuela’s depressed economy.

The headwinds that the region has been facing since 2014 have not abated. Prices of major commodities have been and will continue to be lower on average in 2015 than they were in 2014 due to a stubbornly-strong U.S. dollar and concerns that a supply glut is growing amid weak global demand, particularly from China. The recent plunge in China’s main equity markets, which wiped out some USD 4 trillion in market capitalization, suggests growth in the Chinese economy will be softer in the second half of the year. The region’s major commodities producers, particularly oil and metals producers such as Chile, Ecuador, Colombia, Mexico, Peru and Venezuela, are feeling the impact of the price plunge.

In addition to the commodity slump, major Latin American currencies continued to weaken remarkably against the U.S. dollar at the outset of the second half of the year. At the end of July and beginning of August, many Latin American currencies hit fresh multi-year lows in reaction to lower commodities prices, disappointing economic activity and the prospect of the Fed hiking interest rates before the end of the year. Analysts are divided on whether the rate hike will take place in September or December. Domestic factors also aggravated the decline in value of some of the region’s currencies that took place in July and August. In Brazil, the real touched a 12-year low following the government’s announcement of a reduction to its 2015 primary budget surplus, which increased investors’ fears of a credit downgrade. In Mexico, oil companies competed for 14 exploration blocks in the first phase of the so-called Round One (or Round 1.1) of the energy reform. Disappointingly, successful bids were made on just two of the fourteen blocks that were offered, which undershot the government’s expectations that at least four or five blocks would be bid on.

On the monetary policy front, Central Banks across the region continue to endorse a wait-and-see approach to setting monetary policy rates until the Fed makes a move. Moreover, major Central Banks in the region will continue to monitor the evolution of their currencies against the U.S. dollar and in some cases they may directly intervene in the foreign exchange market to counteract depreciation.

Latin America’s economy will decelerate this year, say analysts who cut the 2015 outlook this month

Sluggish economic growth within the region coupled with lower commodities prices are weighing on the region’s economic outlook. Latin America is expected to experience lackluster economic growth this year. In fact, this could very well be the region’s worst economic performance since 2009, when the global financial crisis took its toll. Analysts that participated in this month’s Consensus Forecast elaborated by LatinFocus reduced the region’s growth forecast from the 0.5% expected last month to 0.4%, which would represent a deceleration over last year’s 1.3% growth. Participants in the LatinFocus Consensus Forecast see the region’s economy picking up the pace next year and growing 1.8%.

The cut in the region’s 2015 economic outlook stemmed from lower growth forecasts for the majority of the economies surveyed, including Brazil and Mexico, which are the two largest economies in the region. Other major Latin American economies for which 2015 GDP growth forecasts were cut this month were Chile, Peru and Venezuela. The economic forecast for Colombia was left unchanged, while Argentina and Ecuador were the only countries for which growth prospects were revised up. In the case of Argentina, this was the fifth consecutive upward revision to the outlook.

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BRAZIL | Government calls for a reduction in primary surplus; currency plunges to 12-year low

Brazil’s economy continues to disappoint. After two consecutive quarters of growth, Latin America’s largest economy shrunk in the first quarter of 2015, dragged down by falling private consumption, which recorded its worst result in over six-years. More recently, retail sales lost steam in May and industrial production swung back to a contraction in June. The gloomy economic data and increasing political uncertainty have caused confidence levels to languish at low levels, with consumer confidence plummeting to a new record low in July. The economy’s poor performance has caused tax revenues to dive and on 22 July the government asked Congress to approve a significant reduction to its 2015 primary budget surplus target. The government revised its target down from a primary surplus of 1.10% of GDP to a meagre 0.15% of GDP. Moreover, there is still a possibility that the government could miss this target if the economy deteriorates further than expected or political support for austerity measures wanes.

Austerity measures, high inflation and depressed confidence are expected to dampen private consumption further this year and cement the economy’s downward trajectory. LatinFocus panelists see the economy recording its worst result in over two decades and tallying a 1.7% contraction in 2015, which is down 0.3 percentage points from last month’s forecast. For 2016, panelists see the economy rebounding and growing 0.3%. 

MEXICO | Peso breaks psychological barrier amid no signs of robust growth

In Q1, the Mexican economy posted the ninth consecutive quarter with sub-3.0% year-on-year growth and recent data suggest that a robust rebound is not in the cards for the near future. In May, economic activity increased at the slowest pace in nine months, dragged down by a contraction in the industrial sector. That said, the weakening of the peso and the recovery of the U.S. economy provided a positive impulse to exports, which increased in June, rebounding from May’s dismal performance. After a year of persistent weakness, the Mexican peso reached uncharted territory in the second half of 2015. The currency broke the 16 MXN per USD barrier in July in reaction to a fall in oil prices, the markets’ view that an increase in U.S. interest rates would take place before year-end and an economy that has failed to meet expectations. Adding to the disappointment, there was insufficient investor interest to attract sufficient bids to warrant contracts in Mexico’s first step toward opening the oil sector.

Analysts that participated in this month’s Consensus elaborated by LatinFocus cut Mexico’s 2015 growth forecast from the 2.6% expected last month to 2.5%. Although forecasters still expect that growth will be supported by a recovery in the United States and an increase in investments related to the structural reforms, they are becoming more pessimistic regarding the slash in government spending, the disappointing implementation of the structural reforms and the erosion of the currency. Next year, panelists see the economy picking up momentum and expanding 3.2%.

ARGENTINA | Against a backdrop of better economic prospects Argentinians head to the polls

Argentina’s economy accelerated in the first quarter and GDP growth more than doubled the previous quarter’s expansion. More recent data show that the positive momentum has likely been carried over into the second quarter. Economic activity picked up in May as the government speeds up spending ahead of the October elections and industrial production recorded the first expansion in nearly two years in June due to a rebound in the automobile industry. Against the backdrop of a better economic outlook and more confident consumers, Argentinians headed to the mandatory primary elections on 9 August. Official results show that the Front for Victory’s candidate Daniel Scioli leads with nearly 39% of the vote, while the head of the opposition, Mauricio Macri, managed to gain 31% of the vote. These tight results, which are seen as the most accurate indicator of who is better positioned to succeed President Cristina Kirchner, suggest a second-round vote will likely be necessary after the main election is held later this year.

Expectations that a new government will implement more orthodox economic policies after the presidential elections, coupled with a gradual recovery in commodity prices, will support the economy going forward. As a result, LatinFocus Consensus Forecast panelists upgraded their GDP forecast for the fifth consecutive month. The panel expects the economy to expand 0.6% in 2015, which is up 0.2 percentage points from last month’s estimate. For 2016, the panel expect GDP to grow 1.5%. 

VENEZUELA | Data scarcity obscures presumably dismal economic reality ahead of December elections

Venezuela’s data drought continues. The Central Bank still has not released GDP figures for Q4 2014 or inflation data since December, amplifying speculation that the country’s economic decline has worsened this year. Recent evidence suggests that inflation continued to soar in June and the bolivar traded in the parallel market is rapidly approaching 700 VEF per USD amid increasing dollar shortages. Against this backdrop, the country is gearing up for congressional elections in December of this year. The government’s popularity has fallen notably in tandem with the economy and early polls show that the fragmented opposition has a chance at winning a majority in congress. However, skepticism over how credibly the upcoming elections will be conducted has increased in the past month. In July, members of the opposition, including leader María Machado, were banned from running in the election, a move that resulted in international criticism and fueled domestic protests against the government.

Venezuela’s prospects are bleak. Falling economic activity combined with skyrocketing inflation and low oil prices are expected to fuel the economy’s largest contraction in over a decade. LatinFocus Consensus Forecast panelists see a 6.3% contraction in GDP for 2015, which is down 0.2 percentage points from last month’s forecast. For 2016, the panel sees GDP falling 2.0%. 

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INFLATION | Inflation maintains upward trend in June

Recent data compiled by LatinFocus showed that inflation in Latin America jumped from 13.1% in May to 13.6% in June. Inflation in Argentina, while more moderate in recent months, continued at a double-digit rate in June. Meanwhile, in Venezuela—where official statistics have not been released—our analysts estimate that inflation worsened from December 2014’s 68.5% (the last month for which official data are available) in the first half of 2015. Analysts estimate that inflation in Venezuela jumped from 117.6% in May to 126.4% in June.

Due to higher inflation in the region, analysts polled this month by LatinFocus raised Latin America’s 2015 inflation forecast from 16.8% in July to 17.6% in August. The result reflects the fact that panelists foresee higher inflation rates in seven of the eleven economies analyzed. The situation in Venezuela is frightening as inflation is expected to be at the 150% mark at the end of 2015. For 2016, inflationary pressures in Latin America are expected to fade gradually and panelists see inflation ending the year at 12.4%.

Written by: Ricardo Aceves, Senior Economist

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